Corporate insurance 101: Loss ratios

When it comes to running a business in China, and indeed in any country, there are a number of important things that all companies, regardless of industry, should acquire. One such thing is insurance. From insurance on your assets to the always popular health insurance, it is important to secure the best available in order to protect your business in increasingly tough operating conditions. Experts all agree that insurance is one of the best ways to mitigate risk, but it can be hard for many business owners to determine whether their insurance plans are actually successful. One of the most useful tools for providing oversight of your insurance plans is the loss ratio. The question is: What exactly is a loss ratio and how can it help businesses?

What is a loss ratio?

A loss ratio, often referred to by insurance companies as a claims loss ratio, is simply the difference between the premiums you have paid for insurance and the dollar value of claims that have been submitted against the plan.

This is one of the most important ratios for insurance companies as it allows them to determine the success of the plans they are offering, and whether or not the premiums they are taking in consist of enough funds to cover claims.

How does knowing loss ratio help businesses?

While the loss ratio is primarily used by insurers, Pacific Prime has found that the same information (premiums paid and claims submitted) is extremely useful for businesses, as it is used to determine what we refer to as a 'fair claims loss ratio'. This ratio is usually an amalgamation of plan information that ensures there will be enough premiums in the corporate pool to pay for claims while also covering other costs like administration of the plan by the insurer and some profit. Essentially it is a rate the company believes to be fair for both them and the insurer.

This ratio is calculated by looking at historical claims and premium data to determine a baseline ratio that can then be used by business owners, and plan administrators too:

Judge the overall performance of your company's plans going forward.

Identify anomalies in claims that need to be addressed e.g., expensive cancer treatments, or increased claims for expensive diseases like diabetes.

Determine whether your insurance provider will increase premiums

Predict future claims loss ratios.

Predict future coverage needs.

How do I interpret the results?

If you have already determined your company's yearly loss ratio and have a fair claims loss ratio already established, there are a number of ways you can interpret the results. Before we look into them, however, it is important to note that the loss ratio and fair claims loss ratios will be different for each company and each type of insurance. This is due to many factors, including the company's location, the average age of the insured, the type of plan secured, the number of claims submitted, the type of claims submitted, etc.

For example, a company that offers international health insurance to 200 employees with the average age of 30-40 years old will usually see a health insurance loss ratio of anywhere between 60 and 80%. The fair loss ratio will usually be anywhere in-between, but we have seen cases where a similar group had a fair loss ratio of 120%.

There are a number of things that a change of loss ratio can tell us. Let's take the company from above and assume they have set a fair claims loss ratio of 75% that is based on data from the years 2010 to 2016. In 2016 the total premium paid on their plan was USD 12,500,000 and the dollar value of claims amounted to 10,625,000. Their loss ratio would be 85%. This is obviously higher than their set fair claims loss ratio of 75% which would mean that plan administrators need to look into the claims from the past year.

Generally speaking, having a higher loss ratio than fair claims loss ratio could result in the insurer increasing premiums to ensure that claims are covered in the future. This is also a flag that tells the company that they need to review the claims submitted. For example, maybe there have been a number of high cost claims e.g., cancer treatment or a serious road accident. If this is the case, then you can usually work with your insurer to ensure that your rates don't increase as these events are often rare, so they shouldn't affect your overall premiums. If, however, you have a bunch of small claims, you may need to take steps to better manage the plan, as premiums will likely go up.

If the loss ratio went down, it likely means one of 3 things:

The existing plan is not being utilized by employees. This could be because they don't like the coverage elements, or are simply not using it because they don't need to.

You can upgrade your plan. If you would like to maintain your existing fair claims loss ratio, you could look into introducing new coverage elements, or upgrading from say an inpatient only plan to inpatient plus outpatient.

You are being overcharged. While not overly common, we have come across this situation before where an unscrupulous insurance provider is overcharging.

How can Pacific Prime help?

As a business owner or insurance plan administrator, it can be tough to determine whether your company is truly benefitting from their insurance plans, especially when you start to look into loss ratios and defining fair claims loss ratios. This is where working with a broker like Pacific Prime can help.

Our corporate insurance experts take the time to review your existing insurance and combine this with your knowledge of the best insurance plans on the market. We can then not only help set a fair claims loss ratio, and also identify plans that best meet your needs while maintaining the ratio and ensuring premiums don't increase immensely.

For each and every business we work with, we provide a tailored analysis of a company's loss ratio that is easy to understand. Our analysis includes an in depth assessment of claims per benefit, facility, location and number of claims per person, which helps identify whether performance is in line with expectations or not, and identify any possible areas for improvement. We also combine this with an overview of insurer efficiency, which includes the percentage of claims paid and rejected, communication issues, etc. in order to help gauge perception of the plan.

From there we will make recommendations on whether you should switch plans, stay with existing providers, or even what changes you can make to more effectively manage your insurance solutions.